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Can silver ETFs be a good bet for mutual fund investors?

Can silver ETFs be a good bet for mutual fund investors?

04 Oct 2021

The Securities and Exchange Board of India (Sebi) allowed mutual fund houses to introduce silver exchange-traded funds (ETFs) from this month. Soon mutual funds might be launching silver ETFs.

Just like gold ETFs, investors can use these funds to diversify into parallel assets. However, whether or not silver ETFs are worthy of being included in a retail investor’s portfolio is the question.

Currently, gold is the only precious metal that is available for investors in the form of an ETF. Gold ETFs collectively manage assets worth Rs 16,350 crore as of August 31, 2021.

“Introduction of Silver ETFs is definitely a good development for retail investors looking for investment exposure to silver as an asset class. Like in the case of gold ETFs, silver ETFs too will pass on benefits of price efficiency, liquidity and convenience to retail investors,” says Chirag Mehta, senior fund manager, alternative investment, Quantum Mutual Fund.

However, Mehta cautions investors to keep their expectations in check. “Investors need to understand that the portfolio diversification benefits of gold are much higher than silver and it has to be evaluated on the basis of its investment merit. For now, we will have to wait for the operational details of silver ETFs to come in,” says Chirag Mehta.

Gold and silver are often seen to be similar in a way but experts believe that at times silver’s demand and supply can be totally unrelated and opposite to that of gold.

“Silver ETFs solve major problems for the investors. To begin with, investing in silver becomes effortlessly accessible. Investors that are tired of the complexities of futures contracts and the dangers that are associated with them, could find this mode more comfortable,” said Priti Rathi Gupta, Founder, LXME – a financial planning platform for women in India.

“As per SEBI, for the introduction of silver exchange-traded funds, certain safeguards must be in line with the existing regulatory mechanism for gold ETFs. This means the regulator is expected to continue with the same practice of making fund houses own physical silver bars for silver ETF,” said Gupta.

Explaining further, Gupta said that, “By using this physically-backed strategy, this fund can eliminate a lot of issues and give investors more realistic pricing of the metal it holds. The physical silver market in India is sufficiently deep to support silver, moderating the impact of external factors leading to price fluctuations,” says Priti Rathi Gupta.

However, experts also believe that like gold, silver can also be volatile and hence a risky bet. Fund managers and financial planners say that there is no clarity about the expense ratio and other major dynamics of the silver ETF at the moment so one should wait and watch.